Pension freedoms: A curate’s egg?
While the pension freedoms reforms could be considered a success, Adam Tavener argues that things are far from perfect and trouble may not be too far away.
The latest figures from HMRC show that in total the amount of money that has been accessed from pension pots under George Osborne’s pension freedoms has now exceeded £25bn. That’s a fair chunk of saver’s cash.
Underlying the headline numbers are some interesting trends. Back in 2015 when this regime was first rolled out the number of individuals making such withdrawals was less than half where we are today (539,000 2018-19), but the average withdrawal size was over twice this year’s average, standing at around £18,000 per withdrawal as compared to just over £7,000 this year.
So, what’s happening? Well, the first thing that springs to mind is that the very early adopters probably contained a cohort who just wanted to get their hands on their pension cash, come what may, and the removal of the compulsion to purchase an annuity effectively breached that dam, releasing the pent-up pressure from that group.
Thereafter we have seen a steady increase in the number of people using their ability to access their pots, but in significantly diminishing amounts. This would suggest that the work of advisers, such as accountants and IFAs may, in fact, be paying off and clients are beginning to learn that only withdrawing what you need is far more sensible than taking the whole lot out of what is, and continues to be, a very attractive savings vehicle for most people.
So, the rush to buy Lamborghinis didn’t happen, or at least not much, anyway, and therefore the early-stage doom-mongers are, for now at least, revealed to have been unnecessarily negative about this innovation. I have long argued that the quickest way of turning someone off pension saving is to tell them that they are too stupid to be allowed to make any decisions about how and when they can access it. It seems like both the saving public and George Osbourne agree.
All is far from perfect, however, and I fear that we may be storing up trouble of the mis-advising kind if we are not careful.
Not long ago I appeared on Radio 4’s You and Yours programme to discuss the use of pensions as a vehicle to provide funding for SMEs. Appearing with me was Michelle Cracknell, then head of The Pension Advisory Service (TPAS), the government-sanctioned guidance body for people with questions about all things pension. We both agreed that whilst pension freedoms could be rightly considered a success, a sub-group of freedom users may, in the longer term, be less than pleased.
For SME owners, the lure of using one’s pension pot to provide business funding is a strong one, and in many cases, it makes great sense, especially when existing business borrowing is secured using other personal assets. What many business owners don’t realise, however, is that due to their very status as SME shareholders their pension can be used for this purpose without going through the pension freedoms route which involves both the payment of tax and the limitation of future contributions.
It is quite conceivable that in years to come business owners may come to realise that taking cash out of their pensions under the freedoms rules was probably not the best idea and will in all likelihood look for someone to blame, whether that be their pension provider, adviser or anyone else upon whom they relied for advice. And thus mis-selling scandals are born.
On concluding the Radio 4 interview Michelle and I both agreed that it was imperative that when an individual approached their pension provider enquiring about withdrawals under the freedoms rule the question should be asked, at the earliest possible opportunity, as to the purpose of the withdrawal, and if it transpired that this purpose was for business use, some signposting should occur. This would, at the very least, ensure that the pension owner was made aware that other options might exist that may not have quite such significant long-term effects on the value of their fund.
TPAS and ourselves did get some way down the road in putting together some collateral for use in this situation but, as is often the way when dealing with a government-connected organisation, policy changed and it was decided to roll TPAS together with the various other financial guidance bodies and our initiative stalled. Plus ca change, plus c’est la meme chose…
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So yes, the freedoms have been successful and are, in my opinion, a good thing but not exclusively so, and the problem of SME awareness continues to grow. Accountants and other trusted sources of advice have a big role to play in sorting this out and heading us away from what could otherwise become a sizeable and very expensive headache. As I said, a bit of a curate’s egg, really.
Adam is founder and chairman of Clifton Asset Management Plc, the innovators behind the designated business funding comparison platform Alternative Business Funding, providing high quality finance to SMEs across the UK. Adam hosts ‘...